Danske Bank has been ordered to boost its risk-weighted assets by more than €13 billion after the Danish regulator found that it had under-estimated its risky assets.
The Danish bank’s Irish operations were found by the regulator to have a “significant effect”on the total risk weight of the bank, but it was not a factor behind its decision.
Denmark's Financial Services Authority (FSA) gave the bank four orders, including increasing the risk weights for its corporate exposures, and setting aside additional capital in its solvency need calculations to cover risks deriving from exposures to other institutions from June 30th of this year.
In its accompanying statement, the FSA referred several times to the bank's Irish operations, formerly known as National Irish Bank. It noted that Ireland had a "significant effect" on the bank's risk weighting, resulting in a total group-level risk weight of 36 per cent, of which Ireland accounted for 4 per cent.
Discounted impact
However, in order to compare the bank with its Nordic peers, the FSA discounted the impact of Ireland.
“The adjustment for Ireland is the only adjustment made for geographical differences in portfolio composition,” the FSA said in its report. With Danske Bank’s Irish operations excluded from the comparison, the bank was still found to have too low a risk-weighting.
The regulator said it first informed the bank of the need to boost risk weightings last year and the company didn’t respond. Danske said it may appeal the decision, which relates in part to loss assessments on corporate loans, and left its full-year outlook and financial targets for 2015 intact.
The FSA's action comes as the Basel Committee on Banking Supervision reviews the way lenders model risk and assign capital. The FSA's decision "will reduce our solvency level from a very high level but it may not be that we'll need to go back to the very high level we're coming from," Henrik Ramlau-Hansen, Danske's chief financial officer said. "We've made individual evaluations on the likelihood of these corporate clients missing payments and how much we would lose. That's why we're considering appealing the FSA's ruling."
Lending capacity
It is understood that the move will have little impact on the bank's lending capacity in Ireland in the short-term, although Mr Ramlau-Hansen did note that it will make lending to Danish businesses more costly.
Danske said in its statement that the FSA’s ruling would not change its financial outlook for 2013 or its targets for 2015 though an increasing focus would be on capital.
Danske Bank, which acquired National Irish Bank in 2004, has suffered from its exposure to the Irish economy, although more recently its performance has started to improve.
Impairments forecast
In the first quarter of 2013, losses at the bank's Irish arm fell to €8.8 million, down from €15 million in the same period of 2012. However, it is forecasting total impairments for its Irish operation of €335 million for 2013 and 2014.
The bank is also currently reorganising its Irish operations, having rebranded NIB to Danske Bank earlier this year and closed its branch network. (Additional reporting: Bloomberg)
